Thursday, August 1, 2013

Q&A: I have 100K to invest, what now?

Time for some Q&A segment, I'm loving this. Special thanks to Mr. Romy for this article.

Romy said:

I have read your pesobility blog regarding mutual funds handling by FAMI. Since, I'm interested to try for investments, by the way I am one of the OFW working in the Middle East and planning soon to go for good and stay in Philippines with my family. Please help me or give me guidance that my decision to invest my earnings with FAMI is a right decision.

My plan is l will invest an amount of 100,000 pesos and apply for (Balanced Fund) and decided to keep it shall we say about 15 years then after that, this is the time I will start withdrawing the interest every month as this will serve as my pension benefit. Some of my colleagues and friends trying to convince not to go for it, as they said I will loss 100% and nothing will happen to your earned which you have work for how many years in the middle east. Despite of that discouragement, I want to pursue with your guidance that I am making a right decision and I'm ready for the risk (in case).

Answer:

Thank you for reading pesobility blog and taking time to email.

There are several questions on top of my head right now: Do you plan to have other investments after investing 100K in a balanced fund? Like business, stocks, etc. Another is, what will be your source(s) of income when you're here in the Philippines? Like do you have or plan to start a business, or will you go back to employment?

This will make me better understand your situtation, but let me have a general, unsolocited advice first from the current information.

The One Time Investment

It's okay to invest 100K and leave it for 15 years. I actually commend you for having a very long horizon (15 years), and it's almost certain that your investment will profit. Take note, though, that 100K is relatively a small amount. After 15 years, it will probably become 500K (rough estimate). The question now is will it be enough for you? I think the answer is, No. All the more, the interest you will be withdrawing from it won't be that great; for shopping money maybe, but I'm guessing you will use this for your retirement? If I'm correct, then 500K is a very small amount for retirement.

I would not suggest a one-time investment. I believe that investment is a discipline, and not a one time thing. It's also a risk, and loss of money is certainly possible and you want to equip yourself with the circumstances that go along with investing and not just blindly put money and hope that it grows. In the process, you learn from your mistakes, you will learn from it and make you a better investor who makes better decisions with your finances.

100% Loss in Investment

Do not easily be discouraged with people saying you'll just lose 100% of your investment, because it's likely that they have done it the wrong way, and it might not have been "investing" at all. There are many people who invests in Pre-Need plans, insurances, or college plans, or even Pyramiding and multi-level marketing. I'm not saying this is wrong, but when putting your money in any institution, you should carefully check how they conduct their business. Do a due diligence, how they make money from your money. Example, some businesses, by its very nature, will go bankrupt. This is true, especially when the way they profit is just getting more money from people without actual products/services or when the products/services are just a front. This is an entire topic in itself, so research research research.

Bond Market, Stock Market, Mutual funds, Bank investments have been here for many, many years because their foundation is in our industry and economy. Before these institutions/investment vehicles go down, our economy must collapse first. The chances are very slim but not impossible (Look at Greece, Spain, etc).

The Investor Mindset

Investment should be continuous. In general, making 10% per year is already considered a good investment, whether it is from stocks, from mutual funds, UITF or mixed. If 10% per annum is already considered good, your 100K will not really grow into millions if you do it one time. Another thing, investing in something means you really believe in that business, so for example you will invest in FAMI Mutual fund, do your research, is the management of FAMI ok? Does FAMI has a proven track record as a business? Because note that investing is you're owning a part of that company, so it's like you are the part owner of FAMI when you invest in it. And like any part owner, you should regularly do your due diligence, like check if the business is still doing well (not just from rumors or people, but from their financial statements), if there are official news regarding the business, do you believe in the people that run it?

Being a serious investor takes a lot of market analysis and learning investment options, for example what will you do when there's a significant change in inflation, what will you do when interest rates go up, what will you do when China's economy slows down, or when U.S. Fed decides to stop its quantitative easing. These will make your head hurt, and it's certainly not for everybody. Many of us wants the easy route, what's the easiest way to invest.

The Easier Way to Start Investing

If the above is not for you, there's another way; a much simpler way to invest. This is not fool-proof thing, and there are still risks involved but for me this is the easiest way to start and make the right attitude in investing: It's called the Peso-Cost averaging.

The idea is very simple, choose an investment vehicle (like Balanced Fund) or a stock that you're really convinced in. Let's say you are decided that it's balanced fund. Place a fixed amount of money at fixed intervals and do it for long term. Example: Place P10,000 pesos in balanced fund every month, no matter what the market situation is. Or maybe P20,000 per quarter (every 3 months), whichever is the most convenient to you, as long as you can place a fixed amount at a fixed interval.

Study shows that in the long term, there's a high probability that you will profit. The profit may not be as large compared to analyzing the markets, but it's certainly easier, less stressful, and you'll learn a lot from it too. This is not realized in short term, it should be long term like more than 3 years. Look at it like paying your monthly bills, you should be disciplined to invest consistently.

Final Words

In the end, if you have 100K, I would suggest you split it like invest 10K per month consistently then even after the 100K is used up, continue investing 10K per month. After 15 years, you would have saved a lot and profited from your investment. That would be roughly 1.8M + profit from investment if done continuously, as compared to 500K if you do a one time 100K investment after 15 years.

The above is just an example, there are other factors as I said that may affect this. Please do not follow what is written above word per word, but digest the ideas and make your own strategy and plan in investing. I salute OFW's, more power and God bless.